Hey

[Asif]

Dr
Income statement depreciation charge X

Cr
Accumulated depreciationX


And:


Dr

Revaluation reserve (depreciation on
valuation – depreciation on original cost)
X

Cr
Retained earnings
X



Why do we Cr Retained earning with the amount of depriciation while infact depreciation is an expense which reduces the retained earnings ..?

[Acid]

Hi Asif,


I feel that here you are misunderstanding the second entry listed below and required under IAs16 where a revalued asset is depreciated. This entry does not involve any expense .
(This principle is revision of IAS16 as studied for Paper F3 (int) or 1.1 Int. It is not new teaching.)

The first entry you quote did all the expense accounting - the full depreciation expense on the revalued asset was debited to income statement (entry 1) and that is correct under IAS16.
Meanwhile, the credit was made to accumulated depreciation (baalcne sheet account in ledger) for that asset , which was also correct.

None of this asset depreciation may be debited directly to revaluation reserve even though some of it relates to revaluation uplift .

After the above, the second entry is purely a balance sheet entry (required by IAs16) to reallocate the depreciation on the revaluation uplift from


retained earnings reserve (where it has gone initially)

revaluation reserve (where it should in fact be debited, to match the related asset value uplift which was credited there) So the debit and the credit in entry 2 are both to baalcne sheet accounts.


This entry transfers relevant depreciation on the revaluation uplift from the retained earnings reserve, which contains accumulated profits and losses per income statement, and from which it is legal to pay dividends. to the reval reserve , which contains the capital value of all unrealised gains added to asset values to date ( and out of which it is not legal to pay dividends, until the value is actually realised)
.


It ahs to be done this way because you are not allowed to show less depreciation in your income statement than the full amount relating to your declared balance sheet opening asset values/ capital employed (that capital employed reflects the higher net asset values after revaluations. )

If you did not do this transfer every year between the 2 reserves, then you could end up with an asset that has been revalued that was fully depreciated to nil in the balance sheet NBVs, yet there might still be excess value sitting in revaluation reserve for the original revaluation uplift, which would be illogical.

As i said this whole entry is covered at Foundation Knowledge level of ACCA when first teaching about revaluation of assets, so is not wholly a new topic for F7.

Regards

Acid

[ER2008]

Hi Asif
I try to grasp the concept of what Acid tried to explain but i was a bit confused but still gather some of it. I have my view of it which i think should be a little more precise.
Hoping this help if not feel free to contact me.
Ok we are not really crediting depreciation but instead crediting the amount that was realised through use which is coming out from the revaluation reserve and is being credited to retained Earnings. Which is what acid said above depreciation of valuation minus depreciation of cost. This is normally done when the asset is being revalued to a higher valued than cost.
Hope this clear up what you asked.
ER2008

[Asif]

well...i understood this thing already...thank you newayz

[Acid]

well...i understood this thing already...thank you newayz


Asif ,

Did u remember our understanding about this concept which you werent able to understand? I hope you get it know! Also which part u dont understand? :p


Acid

[Asif]

noo man...i dont hve ne question....dont give me ne further shocks !!! btw ER2000 its nyc to see you grasped what ACID said.....Healthy guy :P

[Acid]

noo man...i dont hve ne question....dont give me ne further shocks !!! btw ER2000 its nyc to see you grasped what ACID said.....Healthy guy :P


ROFL ! .... If you need any help pls feel free to ask me!